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Wall Street Wins (Or Doesn’t Lose Much) on Junk Trading

July 15 (Bloomberg) -- A few things went right last month
for Wall Street’s beleaguered bond dealers, helping to prop up
otherwise sagging trading revenue. But that doesn’t mean they’ve
reclaimed Masters of the Universe status just yet.

Here’s what went right: Banks from JPMorgan Chase & Co. to
Goldman Sachs Group Inc. reported second-quarter earnings that
were higher than analysts expected largely on the back of debt-trading revenue that declined less than some of the banks
predicted. In particular, they benefited from more transactions
in high-yield bonds, a record June for U.S. corporate-debt sales
and a couple of decent wagers on Treasuries.

Here’s where the trouble remains: While revenue proves more
resilient than anticipated, profits from trading are still
falling, with JPMorgan’s fixed-income revenue dropping 15
percent and Goldman Sachs’s sliding 9 percent in the second
quarter, excluding an accounting adjustment.

After many quarters of disappointing debt-trading revenues
for Wall Street’s biggest banks, some bright spots emerged in
the three months ended June 30.

Junk-bond trading volumes soared to a daily average of $7
billion in June, a record for the month and 14 percent higher
than the period in 2013, according to data from the Financial
Industry Regulatory Authority.

Better Environment

Brokers typically earn bigger profits to trade lower-rated
debt than higher-rated notes since they don’t change hands as
frequently and carry more risk.

Also, companies sold $160.5 billion of dollar-denominated
bonds in June, the most ever for the month with issuance soaring
to almost three times as much as the period in 2013, data
compiled by Bloomberg show. Not only does this boost transaction
fees, but also lifts trading as investors typically are the most
active buying and selling debt in the first days after an
offering.

“Several events transpired at the end of May, beginning of
June that had a calming influence on the markets,” John
Gerspach, Citigroup’s chief financial officer, said in a call
with investors yesterday. “It was just a better overall
environment,” particularly for credit in June, he said.

What’s more, primary dealers that do business with the
Federal Reserve boosted their net wagers on the longest-dated
Treasuries to as high as $13 billion in the week ended May 28,
the highest level in a year. Such debt gained 4.9 percent in the
three months ended June 30, Bank of America Merrill Lynch index
data show.

So now the question is: Can the biggest banks continue
paring declines in trading revenue? Not necessarily. Even
JPMorgan sees lower trading activity year-over-year heading into
the second half of 2014.